Insuring Damage Caused by Water: Tips from Cavignac & Associates
Wednesday, May 10, 2017
by: Cavignac & Associates

Section: Trends and Tips

Water is essential for survival, but water is also a major cause of damage and destruction. For thousands and thousands of years, mankind has tried to figure out how to control water to keep it from damaging the many things that have been built. Unfortunately, this is an ongoing effort, and while most water damage can be appropriately insured, it is not automatic in a special peril insurance policy and usually requires specific endorsements to cover the exposure correctly. 
The ISO CP 1030 is the most common “Cause of Loss” form.  Once known as the “All Risk” form (which was misleading since the policy contained exclusions including flood and clearly didn’t cover “All Risks”) it is now called the Special Form. 
Basically, everything is covered except what is excluded and Exclusion g, pertains to water.  Here is how it reads:
  1. Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by the wind or not;
  2. Mudslide or mudflow;
  3. Water that backs up or overflows from a sewer, drain or sump; or
  4. Water  under the ground surface pressing on, or flowing or seeping through:
    • Foundations, walls, floors or paved surfaces;
    • Basements, whether paved or not; or
    • Doors, windows or other openings.

But if water, as described in (1) through (4) above, results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage.
The exclusion is quite broad, but as mentioned above you can buy back most of the coverage, you just need to know how to do it.  Let’s look at the various subsections individually.
Section 1 and 2 pertain to “Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by
wind or not;” this is the “flood” exclusion.  There are several ways to cover this exposure.  If the property is in a flood zone, you will have to purchase a primary policy from the National Flood Insurance Program (NFIP).  The NFIP Is a government-sponsored program that provides relatively modest limits (up to $500,000 each for building and contents) for direct damage caused by the flood.  In simple terms, a flood is an excess of water on land that normally is dry. The official definition used by the NFIP is “A general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or two or more properties (at least one of which is your property) from:
  • the overflow of inland or tidal waters;
  • unusual and rapid accumulation or runoff of surface waters from any source;
  • mudflow*; or
  • collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.”
As mentioned above, the coverage from the NFIP is fairly limited.  There are, however, private placement options that will layer coverage on top of the NFIP program.  This can be standalone flood coverage or part of a Difference in Conditions policy.  The advantage of a DIC policy that includes earthquake coverage is that you can pick up “mudflow” caused by earth movement, which is excluded under the NFIP policy.
It is also important to discuss specifically “surface water.”  “Surface water” damage may not be triggered by a “flood.”  Take for example a ground floor tenant that suffers water damage when the fire hydrant in front of their building is hit by a motorist?  Nearly every ground floor operation has a surface water exposure.  Many insurance companies include a “surface water”
submit in their standard property coverage and others are willing to endorse this coverage on to their policy.  The key is to recognize the exposure and make certain it is appropriately covered and at a minimum offered to the client.
Section 3 is commonly referred to as “
Back up of sewer or drains.”  If the backup is caused by a “flood,” the appropriate coverage is a flood policy. Often, however, back up of sewers or drains is not caused by a flood.  Heavy rain, for example, may not qualify as a “flood.  Once again many insurance companies may include a submit for this exposure, and other companies may be willing to endorse their policies to provide full coverage.  As mentioned above, you have to identify the exposure and determine the cost of the coverage so the client can determine if they want to insure it. 
Section 4 deals with water underground which 
flow or seeps through parts of a building like foundations, paved surfaces windows or other openings.  Once again, if this damage is caused by a “flood,” then the applicable coverage would be a flood policy. If, however, it is caused by something else, coverage would need to be arranged. A nominal submit may be included in some property forms, however, if the exposure is significant, specific coverage will need to be arranged. 
Conclusion: Understanding and 
insuring water damage can be complex and because of this such losses are often not insured, underinsured or insured inappropriately.  The time to realize you don’t have the correct coverage is not when it starts to rain.  Like all exposures to loss, the key is first to identify that the exposure exists.  The second step is to determine what can be done to lower the frequency or severity of the exposure.  Once you’ve identified the exposure and taken steps to prevent or mitigate a potential loss, then you can negotiate appropriate insurance coverage. 
*Mudflow is defined as “A river of liquid and flowing mud on the surfaces of normally dry land areas, as when the
earth is carried by a current of water. Other earth movements such as landslide, slope failure, or a saturated soil mass moving by liquidity down a slope, are not mudflows

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